The *default* (baseline starting point) SWR (Safe Withdrawal Rate) for FIRE should be 3%-3.5%, not 4% (29X-33X, not 25X)!

@lindsay

Great question. First, I don't believe a failure rate of 0% using backtesting and/or forward capital market assumptions is fully risk free. "Past performance is not a guarantee of future results", capital market assumptions are educated guesses (even Big ERNs CAPE based projections are still predictions), and black swan events can happen that throw any analysis out the window.

Second, I did not pick the 0% failure rate. Bill Bengen did, when he invented the 4% rule. He defined SAFEMAX (his term for what we typically call SWR) as a 0% failure rate in the backtest data from 1926.

That said, your point is valid in that risk tolerance is individual. The Big ERN SWR toolkit and the Trinity study offer information to pick your own success/failure percentage (increasing SWR for higher failure rate, though the original Trinity study maxed out at 30 year duration).

In my article which referenced this discussion thread, I said risk tolerance (failure percentage) is one of the individual factors which can increase WR (Withdrawal Rate) above a baseline.

I just don't think it is transparent enough to say a failure rate significantly higher than 0% (with the caveats above) should be called safe without qualifications, especially as the 4% rule was defined by Bengen based on a 0% failure rate. Otherwise we're using the same words (4% rule, SWR) to mean different things (0% historical failure rate per Bengen and something else for FIRE), without identifying the different failure rate used to arrive at the SWR. Instead, I argue the baseline starting point (so people know what assumptions they're accepting) should be the most conservative, and relaxed assumptions can be layered on to tailor and make less conservative to suit individual needs (which would have the effect of raising "safe enough" withdrawal / consumption rates).

Each person should decide on their own comfortable failure rate, but without any information about applying an individual's chosen failure rate, I think we should not redefine the 0% failure rate defined in the 4% rule by Bengen.

Cash always acts as a drag. It can only decline in value (relative to inflation). So, if you hold $10,000 in cash then over the course of 3 years it will lose around 8% of its purchasing power (i.e., 2.5% inflation compounded for 3 years). Granted, if you hold it in a money market or HYSA, then you might earn interest enough to offset inflation. But the fact is that not having that money in some return-generating investment means it isn't really working for you. If you are concerned about the effect of cash on your SWR (or you aren't sure how to manage it), then simply exclude the cash from your portfolio total and then calculate your SWR based on the non-cash part of your portfolio.

Agreed. My thinking in advocating for changing the FIRE baseline to 3%-3.5% is that while the SWR series on earlyretirementnow.com is excellent, it is also too long and academic to get many people who would benefit from understanding it to read it. By setting a baseline of 3%-3.5% SWR and then tailoring with the SWR toolkit if they choose to go deeper, or don't like the answer with no more than 3.5%, even without reading much/any of the whole SWR series, a FIRE adherent will be much better off than blindly starting with 4% / 25X. I'm hoping Jonathan's FI calculator will adopt this approach (I gave him feedback here in his FI calculator roadmap topic suggesting 3%-3.5% for simple, and input SWR toolkit output for technical).

@PatrickG, you may be interested in taking a look at

Caution for non-US FIRE adherents: Safe Withdrawal Rates based on simple portfolios vary considerably by country, and are much lower in many countries

where, especially several replies down, in response to the risk parity SWR Toolkit data example, I summarized the difference between the former financial advisors and Ph.D. economists positions and reasoning on efficient frontier and SWR.

I assume you are referring to the Karsten vs Paul Merriman debate on Risk-Parity podcast. I had been considering SCV, but after reading Karsten's post on the subject and listening to the debate, I found Karsten's perspective more credible than Paul, and Karsten's expertise is certainly deeper than Paul's on this subject, so not currently considering SCV.

If you change that to

3%-3.5% SWR (29X-33X) applies to FIRE adherents who don't intend to depend on substantial ongoing earned income after 'retiring', and can be increased with dependency on substantial ongoing earned income

then I would agree with you. And substantial ongoing earned income may be a reasonable assumption for some very early retirees, but not for even many later early retirees (e.g. 50s vs 30s). Regardless, it is not valid for all.

But

3%-3.5% SWR applies only assuming you never earn another dollar from other income sources

is literally incorrect. Does $1 earned during retirement change SWR? Does $1000? What about $10,000 one time? No, none of these would move the needle for a 40+ year retirement. Would earning 25% of expenses yearly throughout retirement change SWR needed from investments? Sure.

Here's the problem - SWR is reasonably well researched, and the rigourous repeatable research supports 3%-3.5%, not 4% for FIRE timeframes. Mitigating factors such as substantial post-retirement earned income over long durations or substantial future non-portfolio income streams help, but only when modeled for individual circumstances, not hand-waved to be OK for everyone. For instance, I never would have REd if my plan depended on substantial ongoing future earned income. Does it mean I know for certain that I won't take on any future earned income? No. But I would not have pulled the RE trigger if I were still dependent on it. I think there are more people in this camp than you think, and the FIRE community promulgating 25X/4% without a caveat about dependence on future earned income or other non-investment income streams can lead to some retiring much earlier than they should have, and discovering too late that they could end up destitute or being forced to work late in life as a Walmart greeter or at McDonalds (not saying there is anything wrong with those jobs, and many choose these for other reasons - just that a lot of people end up forced to take jobs like that because of poor retirement financial planning).

Another way to look at this is combining SWR and reliance on future earned income is analogous to car sales people combining the purchase price of a car with the net trade-in credit, and not breaking the two out separately (the purchase price with no trade-in, and separately the trade-in credit). Unless you know both numbers separately, you have no idea how much you paid for the car, because it conflates two different things. Having SWR depend on reliance on projected future income is conflating these two separate things. If you want your plan to rely on ongoing substantial projected future income -- fine. Then take your living expenses and subtract the projected income, and apply a rigorous 3%-3.5% to the net amount. But if you hand-wave combining the two, you have no way of knowing how much confidence you should have in the plan.

Bottom line is that FI means not being dependent on future earned income. Of course, it is possible to earn income post-FI, but if someone is dependent on future ongoing earned income, they are not FI.

@JC, what you are describing is a couple earning roughly the maximum Social Security (SS) benefit for each spouse, which means both earned near the top SS earnings limit for roughly at least ~35 years (else they would have a bunch of $0s in their average SS earnings history). Assuming a Bachelors degree on average to bump earnings that high puts the couple at roughly retiring at 61. Not the typical FIRE scenario.

Regardless, my point is not that 4% never works, but that the correct starting point is 3%-3.5% until and unless you do an individualized cash flow SWR analysis, such as with Big ERNs SWR toolkit to correctly factor in reasonable individualized expectations of cashflows.